FEER:Shadows Over Softbank's Dream Of Internet Empire
Dow Jones Newswires
November 8, 2000
HONG KONG-- Despite its founder's dream of creating a New Age empire of Internet Businesses, Internet giant Softbank is a jumble of disparate interests that analysts find hard to fathom, the Far Eastern Economic Review reports in its latest edition published Thursday.
A lengthy investigation of Softbank by a team of REVIEW reporters reveals a company pursuing different agendas and at times even groping for direction. Its vast store of Internet-related investments shows few signs of coming together to form the basis of a coherent and durable operating company in the near future. By most estimates, it still makes most of its operating profits from distributing software. Organizational weaknesses and confusion over strategy are partly to blame, the REVIEW says.
Softbank manages about $6 billion through 11 venture-capital funds worldwide, half of it from outside investors. Directly and through its funds, it has stakes in roughly 450 Internet companies globally. In the words of Ronald Fisher, Softbank's main man outside Japan as vice-chairman of U.S.-based Softbank Inc., the company is "the largest and broadest-based participant in the Internet economy." It's also a model for Internet zaibatsu elsewhere, including Hong Kong's Pacific Century CyberWorks and U.S.-based CMGI.
Until recently, the company and its founder, Masayoshi Son, were the toasts of Asia. When its shares peaked in February, Softbank was worth $190 billion. Investment bank Lehman Brothers said the figure would double by year's end, making it equivalent to 8% of Japan's GDP.
But today, Softbank has stumbled. The company is worth just $23 billion, and Son, who used to affect a gentle professionalism, is sounding more like a frustrated evangelist: "This is like a religion, OK? You believe in one big theme, no matter whether people understand it or don't understand it," he told the REVIEW in a recent interview, published in tomorrow's edition.
The immediate need, analysts say, is for Softbank to zero in on certain sectors of the Internet. "They're stretching themselves too thinly. They need to focus," says Lee Yen Anderson, an analyst with Indosuez W.I. Carr Securities in Tokyo. "Otherwise they'll have to write off a lot of investments and shareholders will never see a profit."
By the REVIEW's estimate (Softbank itself wouldn't provide a figure), despite a few successful IPOs, only a handful of the company's roughly two dozen listed holdings in the U.S. are making money. In the year to March, Softbank's net profits fell by nearly 80% to Yen8.4 billion ($77 million) because of reduced proceeds from sales of venture investments. That figure is expected by Indosuez W.I. Carr Securities to recover to around $120 million this year, mainly on the back of investment-fund management fees and an end to losses at the now-disposed-of Ziff-Davis.
But the bear market, which Softbank U.S. venture chief Rieschel believes could last through 2001, is going to hit Softbank doubly hard. It makes it difficult if not impossible for the company to make listings without significant write-downs. It also means it cannot sell shares in listed holdings without setting off a downward share-price spiral.
There are also worries about double taxation. Softbank pays twice on gains from disposals of U.S. shares, once in the U.S. and again in Japan. The rates vary, but on average the company has paid taxes of about 40% on its gains from U.S. venture investments. Taken together, the weak market and the double tax mean that Softbank's $19 billion worth of listed holdings (as of early November) could easily be valued at closer to $4 billion, according to Benjamin Wedmore of HSBC Securities in Tokyo. On that calculation, Softbank's total market value of $23 billion looks generous.
Potential operating losses from its takeover of Nippon Credit Bank also cloud Softbank's balance sheet, the REVIEW says. As Commerzbank Securities wrote in an October 10 report that lowered the company's rating: "Investing in the parent company carries the risks associated with its unprofitable businesses and the uncertainty surrounding NCB."
In theory, Softbank should be making more and more money from the operations of its long-term core holdings. Yet Softbank's operating profits have been falling steadily since 1997. In the year to March, they accounted for just a quarter of pretax profits, down from 100% in 1996, with a large part coming from the company's old-time software-distribution business.
(The Far Eastern Economic Review is Asia's premier business
newsweekly and is wholly owned by Dow Jones & Co. (DJ))
In Asia, Dow Jones & Co. also publishes The Asian Wall Street Journal and provides electronic information services through Dow Jones Newswires and Dow Jones Interactive Publishing. In China, Dow Jones & Co. provides the China Stock Indexes comprising the Dow Jones Shanghai Index, the Dow Jones Shenzhen Index and the Dow Jones China 88 Index. Dow Jones & Co. also has a 50% shareholding in CNBC Asia.
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